HSBC-中國-房地產(chǎn)行業(yè)-中國房地產(chǎn)：通過城市更新項目實現(xiàn)增長的新途徑-2020.7.16正式版

16July2020ChinaRealEstateAnewwaytogrowviaurbanrenewalprojectsAsgrowthbecomesmorechallenging,wehighlighturbanrenewalasakeytheme,catalystanddifferentiatingfactorIt’snotnewbutbecomingmorerelevant;ifexecutedright,itcanbringyearsofprofitcontributionwithlucrativemarginsOuranalysispointstoKWG(Hold),TimesChina(Buy)andLogan(Buy,liftTPby24%toHKD17.80),askeyrisingstarsWhengrowthisharder…Webelieveurbanredevelopmentprojectswillincreasinglyplayanimportantroleinformulatingdevelopers’growthstories,actingaspotentialsharepricecatalystsintheyearstocome.Simplyput,theyofferanewsourceoflandbanksthatenrichadeveloper’slandreservesandsaleableresources.Whilethisisnotnew,itremainsarelevantlong-termthemewithpositiveimplications,bypassingtheissueofhighlandcostassociatedwithopenmarketlandacquisitions.It’sanewmodeofgrowthtobeintegratedintoadeveloper’scorebusinessthatfacesincreasinglyintensecompetitionandinviteskeenparticipationamongpeers.Theupsideliesinthelucrativemarginsalongwithyearsofpotentialprofitcontributions,inourview.Separatefromthisreport,weinitiatedcoverageofTimesChina(1233HK)atBuy(seeInitiateatBuy:Stillcheap,aliveandkicking)asaleaderinurbanrenewalprojectsandhighlightitasoneofourkeypicks,alongwithCRL,CIFI,CGandLogan,allratedBuy.…urbanrenewalprojectsserveasakeydifferentiatingfactorandcatalyst:Asdevelopers’saleshaveseensignificantgrowthsince2017andthepostCOVID-19salesrecoveryhaslargelyplayedout,webelieveexpertiseinurbanrenewalprojectsbecomesakeydifferentiatingfactorandrelevantpotentialsharepricedriver.Inthisreport,weprovideablueprintoftheurbanrenewaltheme,detailingdevelopers’projectpipelinesandsaleableresourcestoquantifythepotentialgrowthupside.Consideringthisisalong-termsectortheme,developershavenotablysteppedupdisclosuresrelatedtotheirprogressonurbanrenewalprojects.Threerisingstars:OuranalysisoflandbanksandsaleableresourcesrevealsthatKWG,LoganandTimesChinaarewell-positionedtocapturepotentialupsidefromtheirurbanrenewalprojectpipelinewithprospectivesaleableresourcesbeing4x-plushigherthantheirrespectiveFY19contractedsaleslevel.Keyinvestmentrisksarealengthierandmoreuncertainexecutiontimelineandtherequirementforupfrontcapitalcommitment.ValuationsummaryTickerCurrencyCurrent__TargetPrice___Rating___Upside/MarketCap3mADTVCompanyPriceOldNewOldNewDownside(USDbn)(USDm)TimesChina1233HKHKD14.6219.2019.20BuyBuy31%3.78.7Logan3380HKHKD14.4814.3017.80BuyBuy23%10.37.8CRL1109HKHKD35.0540.9040.90BuyBuy17%32.254.4KWG1813HKHKD13.4613.1013.10HoldHold-3%5.513.6CIFI884HKHKD6.718.608.60BuyBuy28%7.015.6CG2007HKHKD10.5611.5011.50BuyBuy9%29.833.7Source:Bloomberg,HSBCestimates.Note:Pricedon10July2020

EquitiesREMDChinaMichelleKwok*HeadofRealEstateResearch,AsiaPacificTheHongkongandShanghaiBankingCorporationLimitedmichellekwok@.hk+85229966918AlbertTam*Analyst,AsiaRealEstateTheHongkongandShanghaiBankingCorporationLimitedalbert.p.h.tam@.hk+85228224395MaxLiang*,CFAAnalyst,AsiaRealEstateTheHongkongandShanghaiBankingCorporationLimitedmax.liang@.hk+85229966629LouieLu*AssociateTheHongkongandShanghaiBankingCorporationLimitedlouie.y.q.lu@.hk+85229966514OliverYu*AssociateGuangzhouEmployedbyanon-USaffiliateofHSBCSecurities(USA)Inc,andisnotregistered/qualifiedpursuanttoFINRAregulationsAsiamoneyBrokersPoll2020Votingopens1June–7AugustIfyouvalueourserviceandinsight,pleasevoteClickheretovoteDisclosures&DisclaimerThisreportmustbereadwiththedisclosuresandtheanalystcertificationsintheDisclosureappendix,andwiththeDisclaimer,whichformspartofit.

Issuerofreport:TheHongkongandShanghaiBankingCorporationLimitedViewHSBCGlobalResearchat:Equities●REMD16July2020ContentsExecutivesummary4Urbanrenewal:fiveWs7Developers:riskandreward11Keycompaniesandpotentialwinners13ESGconsiderations18Appendix19Companysection21TimesChina(1233HK)22KWGGroup(1813HK)24LoganPropertyHoldings(3380HK)26ChinaResourcesLand(1109HK)28Disclosureappendix31Disclaimer342Equities●REMD16July2020UrbanredevelopmentasapotentialsharepricecatalystFigure1:CRLre-ratedalongwithprogressoftheDaChongurbanrenewalproject4035

RMB/sh30LaunchoftheShenzhenCRCity25phaseIILaunchoftheShenzhen20DaChongprojectenteredCRCityphaseIIIconstructionstage15Launchoftherenewal10projectShenzhenCR5CityphaseIJan-10Jan-11Jan-12Jan-13Jan-14Jan-15Jan-16Jan-17Jan-18Jan-19Jan-20CRLSource:Bloomberg,HSBCFigure2:Logan’srevenuecontributionfromurbanrenewalprojectsservedasasharepricecatalyst16RMB/shPrimarydevelopmentofurban14redevelopmentprojectscontributes18%ofLogan's1H19revenue12108Loganstartedconstructionona6factoryredevelopmentprojectinThelaterbrandedprojectZhuhai(順興不銹鋼廠)4LoganAcesiteCentriumlaunchedinDec201920Dec-13 Jul-14Feb-15Sep-15Apr-16Nov-16Jun-17Jan-18Aug-18Mar-19Oct-19May-20LoganSource:Bloomberg,HSBCFigure3:TimesChina’srevenuecontributionfromurbanrenewalprojectsservedasasharepricecatalystRMB/s/p>

Primarydevelopmentofurbanredevelopmentcontributed8.1%ofrevenueforFY18,apositiverevenuesurpriseReportsfurtherurbanTimesrecordedrevenuerenewalconversiontolandbankandrevenuefromprimarydevelopmentofcontributionin1H19urbanredevelopmentprojectsforthefirsttimein1H18Dec-13 Jul-14Feb-15Sep-15Apr-16Nov-16Jun-17Jan-18Aug-18Mar-19Oct-19May-20TimesSource:Bloomberg,HSBC3Equities●REMD16July2020ExecutivesummaryThisreportexaminesdevelopers’alternativegrowthchannelsviatheirparticipationinurbanredevelopmentprojectsThekeyattractionischeaperlandcost,thoughexecutionrisksarerelativelyhighWeidentifythebeneficiariesthataresettowinthecompetitionfortheseprojects,supportingamorevisibleandfavourablefuturegrowthprofileTimetofindnewgrowthviaTimesChinaOurdifferentiatedreportexaminesthegrowthoutlookofdevelopers,drivenbytheirabilitytoundertakeandexecuteurbanredevelopmentprojects,anincreasinglypopularandhighlysoughtaftersourceoffuturelandbanks.Alongwiththisreport(andinaseparatecompanyreport)andridingonthelong-termstructuralthemeofurbanredevelopment,weinitiatedcoverageofTimesChina(1233HK)withaBuyrating(seeInitiateatBuy:Stillcheap,aliveandkicking)asaleaderinurbanrenewalprojects.Asmajordevelopershavesignificantlyscaleduptheirresidentialsalesbusiness,urbanredevelopmentprojectspresentanalternativewayofreplenishinglandbanksandwilllikelyremainthestrategicdirectionofmajordevelopersinthelongterm.Theuniqueaspectofurbanredevelopmentprojectsisrelatedtothecheapercostofland,whichgeneratesmorelucrativeproject-levelprofitmargins.Indeed,cheaperlandcostisthesinglemostimportantreasonbehinddevelopers’enthusiasticattitudetowardstheirkeenparticipationintheseprojects,asmosthavelongbattledthehighlandcostchallengesstemmingfromtraditionalauctions/tenders,whichnotablyerodedmargins.Roomforalong-termre-ratingTheprospectsofurbanredevelopmentprojectsbringsexcitementtothesector,astheygiveselectdevelopersanedgeandshowdifferentiationamongthem.Webelievethisisexcitingbecauseadeveloper’sjourneytobuildastrongexecutiontrackrecordinurbanrenewalprojectswillbeseenasakeycatalystandsharepricedriver.Aconsistentjourneyofaccumulatingurbanredevelopmentprojectswilllikelyunderpinadeveloper’sre-ratingstory,particularlyforsmall-tomedium-sizeddevelopers.Urbanredevelopmentdoesn’tprovidealevelplayingfieldbecauseprojectsarehardtosecureandexecute.Therefore,despiteadesiretoparticipate,onlyahandfulofcompanieshavedemonstratedsomesuccess.Onekeychallengeisthelongpaybackperiod,giventhelengthydevelopmentcycle,uncertaintytiedtoresidentrelocations,andlandtitleconversion.Assuch,apre-requisiteforparticipatingdevelopersisbalancesheetstrengthandflexibilityduetothelengthydevelopmentcyclethatspansseveralyears.Thispresentsanear-termdisadvantageversusthefastassetturnovernatureoflandsitesacquiredviaauctions.Nevertheless,thelong-termprospectsoftheseprojectsintermsofsalesscaleandprofitabilitymaketheeffortandinvestmentworthwhile.Inourview,developersrecognisethedevelopmentrisksinvolvedandtheneedtostrikeadelicatebalanceintheirpursuitofthesehighlyprofitableprojects.4Equities●REMD16July2020Whowins?Wetakeasimplisticapproachinourassessmentofdevelopersthatmayhavethehighestpotentialtooutcompeteothersundertakingurbanredevelopmentprojects.Giventhatmostdevelopersdisclosetheirestimatedlandbanksandsaleableresourcesfromthefuturepipelineofurbanredevelopmentprojects,wecalculate:PotentialurbanredevelopmentGFAasapercentageofthecurrentlandbank:Thisratioindicatespotentialupsidetothecurrentlandbankuponsuccessfullandtitleconversionofurbanredevelopmentlandsites,whichenrichthesaleableresourcesprojectpipeline.Potentialvalueaccretion(saleableresources)broughtbyurbanredevelopmentprojects:Thisratiodepictsaclearerpictureofdevelopers’salesgrowthpotentialasprojectsintoptiercitiesaresoldathigherpricepoints.Amongourcoverageuniverse,ourcalculationsrevealthatTimesChina(1233HK,HKD14.62,Buy)presentsthemostpotentialupsidetogrowth,followedbyKWG(1813HK,HKD13.46,Hold)andLogan(3380HK,HKD14.48,Buy),allofwhichofferpotentialurbanredevelopmentsaleableresourcesbeing4x-plushigherthantheirrespectiveFY19contractedsaleslevel.Withastrongtrackrecordinurbanredevelopmentprojectsandavisiblelong-termgrowthprofile,wehighlightTimesChinaasoneofourkeypicks,alongwithCRL,CIFI,CountryGardenandLogan.WhileKWGalsofeaturesasastockwithstrongurbanredevelopmentprospect,webelievethecurrentvaluationhasalreadyappropriatelyfactoredinthepotentialupside.Figure4:Developers’urbanredevelopmentprojectpipelinePotentialGFAasofRatiotototalUrbanrenewalsaleableend-2019landbankasofresourcesasofend-2019Compareto2019ImpliedASPCompany(msqm)end-2019(RMBbn)contractedsales(RMB/sqm)LocationofurbanrenewalprojectsTimesChina43187%6458.2x15,000^^GBAKWG1483%5856.8x41,786GBALogan2158%4014.2x19,07695%inGBACRL3153%4651.9x15,000^^98%inGBA,71%inGuangzhouandShenzhenAoyuan*1432%2261.9x15,860Agile612%2001.7x33,333GBA,Beijing,Taiyuan,Xi’an,Tianjin,ZhengzhouGZR&F4072%2001.4xNA60%inGBA,Taiyuan,Xi'anCG^145%1990.4x14,236ShenzhenandothercitiesCIFI^615%GBASource:Companydata,HSBCNote:*Companynotunderourcoverage.^CGandCIFI’snumbersarefrom1H19.^^TimesChinaandCRL’ssaleableresourcesareestimatedbyassumingRMB15,000/sqmofASP,whichistheaverageASPin2018-1H20formajorurbanredevelopmentcompanies.GBA–GreaterBayArea.NA–Notapplicable/available.Figure5:Multipleofdevelopers’potentialurbanrenewalsaleableresourcestoFY19contractedsalesTimesChina8.2xKWG 6.8xLogan 4.2xCRL 1.9xAoyuan* 1.9xAgile 1.7xGZR&F1.4xCG^ 0.4x0.0x 2.0x 4.0x 6.0x 8.0x 10.0xSource:Companydata,HSBCNote:*Companynotunderourcoverage.^Using1H19data.

Figure6:Ratioofdevelopers’potentialGFAfromurbanrenewalprojectstothecurrentlandbankTimesChina187%KWG83%GZR&F72%Logan58%CRL53%Aoyuan*32%CIFI^15%Agile12%CG^5%0% 50% 100% 150% 200%Source:Companydata,HSBCNote:*Companynotunderourcoverage.^Using1H19data.5Equities●REMD16July2020SharepriceperformanceandvaluationFigure7:Sharepricereboundfromtherecentlow

Figure8:Year-to-datesharepriceperformance(%)CIFI61Shimao59KWG56Logan52Yanlord49Times37CG34SZInvestment27ChinaJinmao26ChinaSCE26CRLand25Longfor24Vanke19HSI19COLI15JoyCity9R&F9%Sino-Ocean4020406080Source:Bloomberg,HSBC.Note:Pricedasat10July2020.Recentlowreferstostockpriceduringmid-March.

KWG26Logan13Shimao11Yanlord11CIFI6Longfor3Times-5ChinaJinmao-7Coverageaverage-8HSI-9CRLand-11SZInvestment-13ChinaSCE-13CG-17Vanke-17COLI-17JoyCity-34%R&F-35-60-40-2002040Source:Bloomberg,HSBC.Note:Pricedasat10July2020.Figure9:ChinapropertyNAVdiscount-20%-30%-40%-50%-60%-70%-80%20102011201220132014201520162017201820192020%toNAV +1SDSource:Companydata,RefinitivDatastream,HSBCestimates

Figure10:Chinaproperty12-monthforwardPE15.012.510.07.55.02.50.02010201120122013201420152016201720182019202012MfwdPE(x)+1SDMean-1SDSource:Companydata,RefinitivDatastream,HSBCestimatesFigure11:ValuationsummaryPriceTPMktCap3mADTVNAV(Disc)/FY19aFY20eFY21eFY20eFY19aFY20eNetCompanyTickerRating(HKD)(HKD)(USDbn)(USDm)(HKD/share)Prem(%)PE(x)PE(x)PE(x)Yield(%)PB(x)GearingCOLI688HKHold25.2527.9035.756.246.50(46)4.80.936CRL1109HKBuy35.0540.9032.254.459.40(41)12.71.257ChinaSCE1966HKBuy3.934.600(72)5.54.0128ChinaVanke2202HKBuy27.6030.6047.237.951.00(46)3.81.553CIFI884HKBuy6.718.607.015.618.30(63)6.31.5169CG2007HKBuy10.5611.5029.833.719.10(45)5.01.382ChinaJinmao817HKReduce5.654.308.621.112.20(54)4.51.5198GZR&F2777HKHold9.2911.004.215.753.60(83)16.00.4234JoyCity207HKBuy0.590.700(83)7.70.284KWG1813HKHold13.4613.105.513.650.20(73)6.51.199Logan3380HKBuy14.4817.8010.37.833.60(57)6.22.2103Longfor960HKBuy38.0038.2029.433.363.60(40)12.810.29.04.42.191Shimao813HKHold33.8035.3015.436.650.50(33)5.01.5118Sino-Ocean3377HKHold2.022.302.01.612.60(84)7.20.3109SZInvestment604HKHold2.682.400(62)6.60.544TimesChina1233HKBuy14.636.30(60)4.54.0141Yanlord(SGD)YLLGSPHold1.33.32(59)6.90.5117ChinaProps-simpleaverage18.9(60)8.01.0110ChinaProps-averageexcludingJoyCity20.8(58)6.71.1115Source:Bloomberg,HSBCestimates.Note:Pricedasat10July2020.TP–TargetPrice.6Equities●REMD16July2020Urbanrenewal:fiveWsComparedwithshantytownredevelopment,urbanredevelopmentisabroaderconcept……andalong-termagendaitemthatdepictsChina’scitydynamicsandregionalrealestateprospectsProgressindifferentcitiesacrossthecountrydivergesAnewwaytogrowWhatUrbanredevelopmentprojectsservethepurposeoftransformingandrevitalisingurbanareasinChina.Fromtherealestateperspective,urbanredevelopmentisintendedtoimprovethelanduseefficiencywhilereducingthestockofidleland.Thisprocessbringseconomicactivities,enhancelandvalueandassuch,bringsopportunitiestopropertydevelopersasmoresophisticatedconsumerslooktoupgradetheirlivingstandard.ThereareninetypesofurbanredevelopmentprojectsasdetailedinFigure12below.Figure12:NinetypesofurbanredevelopmentprojectsNo.LeadTypeType(CN)TargetContent1Government-ledExpropriation收儲FactoryThegovernmentexpropriatesthelandandperformsthedemolition;afterwards,thelandislistedforauction2Government-ledRent統(tǒng)租IndustrialparkPublicinstitutionunderthegovernmentrentsandredevelopsrural-collectivelandpreviouslyusedforfactories3Government-ledComprehensive綜合整治CulturalsiteImprovingpublicfacilities,infrastructure,androad,whilenotdemolishingexistingbuildingsredevelopment4Government-ledCooperated合作改造VillageGovernmentinvitestendersfordemolitionwork,thebidderneedstopre-paycompensation;redevelopmentthenthelandwillbeorwillnotbelistedforauction5Market-ledVillageself-農(nóng)村集體自行FactoryThevillageorganisationinvitestenderforearly-stagedemolitionandcompensation;whentheredevelopment改造landisreadyfortransfer,thelanduserightistransferredtoasubsidiarycompanyofthevillageorganisation6Market-ledVillage-enterprise村企合作VillageThevillageorganisationinvitestendersforearly-stagedemolitionandcompensation;whenthecooperationlandisreadyfortransfer,thegovernmentliststhelandforauction7Market-ledEnterpriseself-企業(yè)自改FactoryTheenterpriseselectsacooperativepartner;usechangedfromindustrialusetocommercialredevelopmentuseafterpayingthelandpricedifference8Market-ledAcquisitionand企業(yè)收購改造IndustrialparkTheinvestoracquiresseveraladjacentoldfactories;thelocalnaturalresourcesdepartmentredevelopmentcombinesthelandandtransfersthelanduserighttotheinvestor9Market-ledSingle-entity單一主體歸宗VillageThesingleentitysignsacompensationcontractwithpropertyownersandobtainsequityredevelopment改造interestswithouttransferringownershipoftheland;afterdemolitionandcompensation,thelocalgovernmentsignsalanduserightcontractwiththesingleentitySource:Governmentrelease,HSBCWhereGuangdongprovincehasbeenthemostproactiveprovinceinurbanredevelopmentprojects.Itisthepioneerinthisfield.Despitelimitedparticipationinshantytownredevelopmentprojects(0.56%of2018’sactualnationalconstructionstarts),GuangdonghasinvestedRMB1,580bninurbanredevelopmentsince2009,87%ofwhichfromnon-governmentfunding,redevelopingatotallandareaof534msqm,9%oftheprovince’sbuiltarea(accordingtoSandtheMinistryofHousingandUrban-RuralDevelopment(MOHURD)).7Equities●REMD16July2020Guangdongprovinceiskeentocarryouturbanredevelopmentprojectsasitstoptiercitieshaveasevereshortageofurbanlandareas.CitiessuchasShenzhen,Guangzhou,Dongguan,Zhongshan,Foshan,andZhuhaiarealreadyheavilydevelopedwithanaveragedevelopedarearatioof38%(measuredbydevelopedareaofcityconstructionoverurbanlandarea).Guangdongprovince’sratiocameinsubstantiallyabovethenationalaverageof2%,whichpresentsanotherincentiveforthegovernmenttopushforwardtheseprojects.InSeptember2019,Guangdong’sDepartmentofNaturalResourcesannouncedathree-yearplantostepupeffortsinurbanredevelopmentprojects,targetingRMB500bnoftotalinvestmentand153msqmofconstructionstarts.Theregionalpolicywasannouncedinabsenceofwidernationwideguidelines.Figure13:Majorcities’urbanredevelopmentplanfor2019-21Plannedredevelopmentarea(mu)Asa%oftotalplannedareainDevelopedarearatio^GuangdongGuangzhou54,00023%25%Foshan40,00017%35%Dongguan21,00012%43%Shenzhen27,0009%50%Zhuhai9,0004%35%Zhongshan9,6004%39%Guangdong230,000100%38%National2%Source:Governmentrelease,CEIC,HSBCNote:^Developedarearatioequalsdevelopedareaofcityconstructionoverurbanlandarea.WhenWhilethegovernmentfirststartedtopromoteurbanredevelopmentprojectsin2008,itisnotablethattheintensityofpolicyinitiativeshaspickedupinrecentyears.Figure14belowprovidesasnapshotofkeypolicyannouncement.Figure14:PolicydevelopmentofurbanredevelopmentprojectsApr2020NationalDevelopmentandReformCommission(NDRC)pointedtourbanredevelopmentasavitalmethodtoenhancethelivingandproductionenvironmentincitiesAug2019TheNDRCencouragedupgradingindustrialcitiesthroughtheredevelopmentofoldfactoriesFeb2019Urbanredevelopmentwasmentionedasameasureforurban-ruralintegrationintheGBA2016planTheStateCouncilissuedguidanceontheredevelopmentofinefficientlyusedlands,2016promotinginvolvementofprivatecapitalShenzhenproposeda5-yearplan(2016-20)forurbanredevelopment2015GuangzhouandShanghaiannouncedpoliciesonurbanredevelopment;Guangzhou2009establishedthefirsturbanrenewalauthorityinChinaGuangdonglaunched“threeold”(oldtown,oldvillageandoldfactory)transformation;2008ShenzhenannouncedtheguidanceonurbanredevelopmentTheStateCouncilissuedacirculartopromoteefficientandintensiveuseofland1949UrbanredevelopmentprojectsinChinadatebacktothefoundingperiodofthecountry,suchastheredevelopmentofHutonginBeijingSource:Governmentrelease,HSBC8Equities●REMD16July2020WhoUrbanredevelopmentprojectsinvolvethreeparties:thegovernment,thedeveloperandthecommunity.Alocalgovernment’sroleandobjectivesareclear:topreventurbandecay,upgradeinfrastructureandultimatelytransformoldareasforprovisionofbetterlivingconditions.Adeveloper’sroleistohelpexecuteandthekeenattitudetowardsparticipationlieswithlucrativeprofitability.Whilstcommunitiesandvillagesinvolvedplayamorepassiveroleintheprocess,residentsarerecipientsofcompensationand,assuch,welcomeurbanrenewalinitiatives.Figure15presentsaschematicforatypicalmarket-ledoldvillageredevelopmentprojectwherewehighlightthekeystakeholdersinvolved.Beforethedeveloperacquiresthelanduseright(LUR),itneedstopre-paycashcompensationanddemolisholdbuildings.Intheprocess,thenatureofthelandischangedviatheNaturalResourcesDepartmentfromcollective-ownedtoconstructionuse.Theownershipofthe‘landforrelocation’stayswiththevillageorganisation(previousownerofthelandforurbanrenewal;aspecialformofpublicorganisation),whilethedeveloperacquirestheLURofthe‘landforfunding’(融資地塊)atadiscountedprice,whichisslatedforconstructionofresidentialhousingtobelaunchedforsale.Eventually,thedeveloperisrequiredtobuildhousingontherelocationlandfirst,beforereceivinganycashbackthroughhomesalesonthelandforfunding.Figure15:ProcessflowforNo.6–Village-enterprisecooperation(market-led)1.SelectdeveloperviaVillageorganisationDeveloperstransactioncentrepubliclySettlecompensationanddemolitionNaturalResources2.SettlecompensationandDepartmentdemolition4.Allocateland4.Sellland￥￥￥3.Changingofland-useGovernmentLandforfundingGovernment（融資地塊）Fundingarea:relocationarea≈1:1Landforrelocation（安置地塊）Source:Governmentrelease,HSBCFigure16:OldfactoryredevelopmentprocessOwneroffactory5A.ReturnpartofGovernment1.Acquirelandpremium4A.Paylandpremium3B.Paydiscountedownershipoflandpremiumfactory2.PrimarydevelopmentLandfor3A.PublicauctionDeveloperAcquirerofland4B.ObtainlandconstructionuserightSource:HSBC9Equities●REMD16July2020WhyWhilethemotivesandtheincentivesofdifferentstakeholdersvary,theprocessisintendedtofacilitatemoreefficientlanduse,bringingpositivesocialandeconomicchangestothetargetregion.Assuch,itisnotsurprisingthattier-onecitiesinGuangdongprovincetooktheleadinthisprocessasamoreaffluenteconomy.Thereareflagshipurbanredevelopmentprojectsthatwecanpointtoascasestudiesthatdemonstratethekeybenefitsbroughtaboutbytheprocess.Refertopage13forCRL’sDaChongproject(laterdevelopedintoShenzhenCRCity).TheestimatedtotalinvestmentoftheprojectamountedtoRMB20bnandhassignificantlystrengthenedCRL’sprofitabilityprofilefrom2015to2019,withRMB36bninrevenuebeingrecognisedfromtheproject.Importantly,thegrossprofitmarginfromthisprojectwasalsomeaningfullyhigherthanthatofotherassetsinCRL’sportfolio,leadingCRLtooutshineitssectorpeersintermsofprofitability.Inourview,thiswasalsoareasonthathaddrivenCRL’ssharepricere-ratingfromcRMB10toRMB30(Figure17).Figure17:CRLsharepriceandDaChongVillageredevelopmenttimeline4035

RMB/sh30LaunchoftheShenzhenCRCity25phaseIILaunchoftheShenzhen20DaChongprojectenteredCRCityphaseIIIconstructionstage15Launchoftherenewal10projectShenzhenCR5CityphaseIJan-10Jan-11Jan-12Jan-13Jan-14Jan-15Jan-16Jan-17Jan-18Jan-19Jan-20CRLSource:Bloomberg,HSBC10Equities●REMD16July2020Developers:riskandrewardBeingprofit-oriented,developer-ledprojectsbringmonetarybenefitsthatstrengthenacompany’searningsprofileThekeyriskisrelatedtoexecutionuncertainty,whichbringscashflowandbalancesheetissuesWithprudentbalancesheetmanagement,therewardsareseentooutweightherisksReward:LucrativeprofitandstrongerbrandWebelieveurbanredevelopmentprojectspresentgoodopportunitiesfordeveloperstoacquirelandatlowcostandtogainmarketshare.Thegrossprofitmarginscouldbeashighas70%.Inmanyinstances,theseprojectscoveralargelandplotandinvolvetheconstructionofcommunityfacilitiesthatbecomeslocallandmarks,anattractiontolocalresidentsandtourists.Withlowerlandcost,developersareabletoeffectivelyredirectfinancialresourcestoimprovebuildingqualityandstandardsbyinvestinginprojectdesign,technologiesandinnovativeconstructionprocesses.Thisshouldinturnimprovetheproject’spricingpowerwhilestrengtheningtheparticipatingdeveloper’sbrandequity.Forinstance,theHuashanprojectinJinanisamilestoneinCOLI’s(688HK,RMB25.25,Hold)urbanredevelopmentpastexperience.Coveringanareaof12msqm,theprojectcontains24villagesandover1,700enterprisesaroundaniconicmountainandlake.COLIspentnearlyfiveyearsturningtheoldvillagesintoamoderntownwithasufficienttransportationnetwork,andbusinessandpublicservicesfacilitiesinanattractivesetting.ThissuccessfulcasehasnotonlybroughtpraisetoCOLI,butithelpedthedevelopertakeasignificantstepforwardtobecominganefficientcityoperator.Theabilitiestoplanlarge-scaleprojects,reconciliatetheinterestsofdifferentpartiesandefficientlyrunamixed-userealestatecomplexareseenasvaluableskillsandexpertisethatbodeswellforthelong-termdevelopmentofthecompany.Last,butnotleast,adeveloper’sinvolvementinurbanrenewalprojectsisalsoseentobeanexercisetostrengthenrelationshipswithlocalgovernments,whichimprovesthecompetitiveadvantageinbiddingforfutureprojects.Riskanalysis–ifnegotiationstaketoolongExecutionrisk:lengthydevelopmentcycleItusuallytakes4-6yearstocompletearedevelopmentproject,whileinaworstcaseitcouldtakeover10years.Thebottleneckiscompensationandresettlement,becauseeveryhouseholdhasacommongoalofmaximisingcompensation,eitherincashorinresettlementhousing.11Equities●REMD16July2020Forvillageswithalonghistory,confirmingtheownershipandtheactualareaofahomecanbeachallengeandmayleadtopotentialconflictsamongsthouseholdmembers.DisagreementsonGFApresentanotherriskandconflictbetweenresidentsandthegovernment.Comingtoanagreementoncompensationisconsideredthebiggestobstacle.Ultimately,itisthegovernment’sexecutionabilitythatiskeytodrivingaproject’sdelivery.Insomeinstances,failuretocometoanagreementcouldleadtoaproject’ssuspensionforanextende